Banks are back in the commercial real estate game after sitting on the sidelines for the past two years.
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The number of banks reporting tighter loan conditions was almost at zero, according the Federal Reserve’s latest quarterly survey of senior loan officers, first reported by CoStar.
Bank demand for CRE hasn't reached such levels since the first quarter of 2021.
They have already seized back some market share. Banks accounted for 43% of loan closings in the fourth quarter by non-agency lenders, up by 18% from the previous quarter and 40% from a year ago, according to a report by CBRE.
Banks were back at the top of the pecking order among sources of CRE debt. Life insurance companies were the second-most active lending group, followed by alternative lenders, accounting for 33% and 23% of loan closings in Q4, respectively. The CMBS conduits sector made up the remaining 1.5% of origination volume, down from 3% a year before.
Historically, banks have been responsible for half of CRE debt. But financial institutions stepped back following multiple bank failures as the sector was forced to rework existing loan books. In the third quarter, life companies topped the list of loan originations with 43% followed by alternative lenders with 34%.
Banks' renewed appetite for CRE lending helped a recovery for debt in the sector overall. The CBRE Lending Momentum Index, which tracks the pace of CBRE-originated commercial loan closings in the U.S., rose by 21% from the third quarter and was up 37% year-over-year.
More debt fueled more purchasing. Investment volume in U.S. CRE in the fourth quarter increased to $121B, up 24% quarter-over-quarter and 31% year-over-year. Annual volume reached $392B.
In the quarter, private investors accounted for more than half of that investment, though institutional investment volume also increased.
Average underwritten cap rates decreased by 14 basis points quarter-over-quarter to 5.9%, while debt yields fell by 46 bps to 9.4%. The average loan-to-value ratio increased to 64.1% from 62.8%.
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